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A health savings account (HSA) is a tax-exempt or custodial account set up with a qualified HSA trustee to pay or reimburse certain medical expenses incurred by an individual, his or her spouse, and qualified dependents.The medical expenses must not be reimbursable by insurance or other sources, and distributions from HSA funds will not give rise to a medical expense deduction on the individual’s tax return.
Qualifying for an HSA
To be eligible, a participant must meet the following requirements.
• Must be covered under a high deductible health plan (HDHP).
• Cannot have any other health coverage.
Exception: Coverage for specific things, such as disability, dental care, vision care, and long-term care, can be purchased in addition to the HDHP without disqualifying the HSA.
• Cannot be enrolled in Medicare.
• Cannot be eligible to be claimed as a dependent on someone else’s tax return.
Last-Month Rule
If an individual is an eligible individual on the first day of the last month of his or her tax year (December 1 for most taxpayers), that individual is considered an eligible individual for the entire year. Special rules apply if the individual does not remain an eligible individual during a full 12-month period. Exceptions apply in case of death or disability.
Spousals HSAs
The HSAs cannot be joint accounts. Each spouse must open a separate account. However, if only one has an account,the funds in that account can be used to pay for expenses incurred by the other spouse, as well as the participant’s other family members.
High Deductible Health Plan (HDHP)
An HDHP can provide for preventive care benefits without a deductible or with a deductible below the minimum limit ($1,350 for 2019 self-only coverage and $2,700 for 2019 family coverage). Family HDHP coverage covers an eligible individual and at least one other person.
Prescription Drug Plans
An HDHP can include a prescription plan as long as it does not provide benefits until the minimum annual deductible has been met.
Family Plans with Deductibles for Both Family and Individuals
Some family plans have deductibles for both the family as a whole and for individual family members. If either the deductible for the family as a whole, or the deductible for an individual family member, is below the minimum annual deductible for family coverage, the plan does not qualify as an HDHP.
Example: Joe has family health insurance coverage in 2019.The annual deductible for the family plan is $4,500. His plan also has an individual deductible of $2,000 for each family
member. His plan does not qualify as an HDHP because the deductible for an individual family member is below the minimum annual deductible ($2,700) for family coverage.
Other Health Coverage
The individual (and spouse if holding family coverage)generally cannot have any other health coverage that is not an HDHP. An individual can still be eligible even if the spouse has non-HDHP coverage, provided the taxpayer is not covered by that plan.
Contributions
Contributions for a tax year must be made by the return due date (no extensions).
HSA Limitations
Annual contribution limit is limited to:
2018 2019
Self-only coverage, under age 55 $ 3,500 $ 3,450
Self-only coverage, age 55 or older $ 4,500 $ 4,450
Family coverage, under age 55 $ 7,000 $ 6,900
Family coverage, age 55 or older* $ 8,000 $ 7,900
Minimum annual deductibles:
Self-only coverage $ 1,350 $ 1,350
Family coverage $ 2,700 $ 2,700
Maximum annual deductible and out-of-pocket expense limits:
Self-only coverage $ 6,750 $ 6,650
Family coverage $ 13,500 $ 13,300
* Assumes only one spouse has an HSA. See IRS Pub. 969, Health Savings Accounts and Other Tax-Favored Health Plans, if both spouses have separate HSAs.
Rules for Married People
If both spouses are eligible individuals, and either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage. The total contribution limit for 2019 is $7,000 (if both spouses are under age 55),split equally unless they agree on a different allocation.Special rules apply if either spouse is over 55 or enrolled in Medicare.
Distributions
The following rules apply to distributions from HSAs.
• Distributions used to pay for, or be reimbursed for,qualified medical expenses not covered by insurance are tax free. Distributions for any other purpose are taxable and subject to an additional 20% penalty. Exception:
The 20% penalty does not apply to distributions after reaching age 65, or death.
• Distributions used to pay for medical expenses that were incurred prior to establishing the HSA are taxable.
• Qualified medical expenses include a medicine or drug that:
– Requires a prescription,
– Is available without a prescription (on over-the counter medicine or drug) and the taxpayer gets a prescription for it, or
– Is insulin.
• Qualified medical expenses do not include the insurance premiums for the high deductible health plan.However, insurance premiums for long-term care(subject to limits) and health coverage while unemployed qualify. Also, if over age 65, health insurance premiums (other than Medi gap premiums) are qualified medical expenses for HSA purposes.
Employer Participation
Employers can provide employees with high deductible health plan coverage and contribute to an HSA on behalf of an employee and exclude the value of the benefits from taxable wages.
Death of HSA Participant
If a spouse is the beneficiary, the spouse is treated as the participant HSA of the after the death of the original participant. If someone other than a spouse inherits an HSA, it stops being an HSA and the FMV becomes taxable to the beneficiary in the year of the HSA participant’s death. If the estate is the beneficiary, the FMV is taxable on the decedent’s final Form 1040. Any taxable amount is reduced by qualified medical expenses of the decedent paid within one year after the date of death.